Updated rules for Qualifying Free Zone Persons

The QFZP regime was previously supplemented by CD 100 and MD 265. CD 100 sets out rules on how to determine Qualifying Income for a QFZP in the context of the QFZP regime, whereas MD 265, in particular, provided clarity on the definitions of Qualifying Activities and Excluded Activities.

These latest updates only impact MD 265 (i.e. it is repealed and replaced by MD 229). CD 100 remains in force and is not impacted by these changes.

a. ‘Qualifying Commodities’

The ‘Qualifying Commodities’ definition in MD 265 was limited to metals, minerals, energy, and agricultural commodities in raw form, that are traded on a Recognized Commodities Exchange Market (as defined).

The definition in MD 229 is now broadened by including industrial chemicals, Associated By-products (newly defined term) and environmental commodities (e.g. carbon credits, renewable energy certificates). The expanded list of commodities will only qualify provided a Quoted Price (as defined) for such commodities exists.

The definition also no longer requires the commodities to be in a ‘raw form’. However, any goods packaged for retail sale are explicitly excluded.

b. Recognized Commodities Exchange Market

The ‘Recognized Commodities Exchange Market’(“RCEM”) definition is expanded in MD 229 to make it clear that where a commodities exchange market is recognized and established outside of the UAE, it must be licensed and regulated by the relevant foreign authority. The definition is also expanded to include any commodities exchange market as specified in a Ministerial Decision.

c. ‘Quoted Price’ and price reporting agencies

Under the new Ministerial Decisions, a commodity may qualify as a Qualifying Commodity provided that a Quoted Price exists for that commodity or for a Related Commodity.

The new ‘Quoted Price’ definition in MD 229 has the effect that quoted prices must be used to substantiate commodity pricing with reference to a RCEM, or a recognized price reporting agency specified by a decision issued by the Minister.

The list of entities that are considered to be recognized price reporting agencies have been issued as part of MD 230, which also came into effect retroactively on 1 June 2023.

It is no longer a requirement for a commodity to be physically listed on an RCEM in order to qualify. Instead, a price specified through the recognized reporting agencies is sufficient, thus offering flexibility and alignment with international market practices where prices for many commodities are derived from reporting agencies rather than listing on commodity exchanges.

An additional amendment is the addition of “Related Commodity” by reference to commodities within the same Harmonized System Nomenclature (“HSN”) Chapter. This ensures that commodities of a similar nature and use, though not directly traded or priced individually, are treated consistently for QFZP purposes by referencing the price of a related commodity within the same HSN classification.

d. ‘Uplift Expenditure’ in the context of Qualifying Intellectual Property

The ‘Uplift Expenditure’ has been clarified to mean 30% of the Qualifying Expenditure (which is the cost to fund research and development activities) thus removing ambiguity in the earlier wording which could be misinterpreted as 130% of the Qualifying Expenditure.

a. Trading of Qualifying Commodities

MD 265 was limited to the physical trading of Qualifying Commodities and associated hedging derivatives.

Whilst MD 229 still includes the above, its scope has now been expanded to include associated structured commodity financing arrangements such as prepayment, factoring, forfaiting, countertrade, warehouse receipt financing, export receivable financing, project finance, Islamic trade finance, and streaming financing.

However, the above activities will not be regarded as ‘Trading of Qualifying Commodities’ if these activities are conducted by a QFZP whose revenues from distribution, warehousing, logistics or inventory management functions constitute 51% (fifty one percent) or more of its (total) revenue for the relevant tax period. This clarification is important as it reinforces the distinction between genuine commodities trading activities and ancillary or support functions such as storage and logistics. The intention is to ensure that the 0% CT rate remains available to businesses that are engaged in the buying and selling of commodities.

b. Treasury and financing services to Related Parties or for its own account

MD 229 merely expanded the scope to include treasury and financing services for a Qualifying Free Zone Person’s own account (e.g. self-investment). This clarification brings the new Ministerial Decisions in line with the Corporate Tax Guide for Free Zone Persons (CTGFZP1).

c. Distribution of goods or materials in or from a Designated Zone

MD 229 has expanded the list of eligible customers by including:

1. Those customers who are processing or altering goods for further sale
2. A ‘public benefit entity’

The term “public benefit entity” refers to an organization formed by private individuals or government or non-governmental bodies for the purpose of carrying out charitable, social, cultural, religious, or other public benefit activities without the motive of making a profit for distribution to private persons.

d. Banking and insurance/reinsurance legal framework

MD 229 updated references to Federal Decree-Law No. 14 of 2018 and Federal Decree-Law No. 48 of 2023 on the Regulation of activities in the context of Reinsurance services (Qualifying Activity) and Banking and Insurance services (Excluded Activities).

The New Decision gives reference to Ministerial Decision No 84 of 2025 (“MD 84”) for the criteria to maintain audited financial statements. While MD 84 was made applicable only to FYs commencing on or after 1 January 2025, the QFZPs are required to prepare audited financial statements for all tax periods commencing on or after 1 June 2023.